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Saturday, March 22, 2014

Let’s put competitiveness back on the agenda

Economy Minister Axel Kicillof talks to the press before entering Clarín’s headquarters.
By Miguel Braun
For The Herald

Though inflation hits the headlines, the country faces other serious macroeconomic problems

Last week, a newspaper headline read: “Inflation already cut in half the competitiveness gained by devaluation.” That was before this Monday, when the INDEC announced that that the official inflation was 3.4% in February (below the 4.3% reported by the unofficial Congress-IPC). Differences notwithstanding, what is clear is that inflation continues to corrode the competitiveness gains obtained through the January mega-devaluation; by official standards, inflation for the first two months reached 7.1% while the exchange rate remains unchanged.

But competitiveness hinges on much more than just the exchange rate. After a decade of exceptional terms of trade (the relation of export and import prices), historically low interest rates and economic growth throughout the world, Argentina still depends on the exchange rate to promote exports. In other words, the country was not able to capitalize those exceptionally good conditions to increase its ability to compete through the quality of its goods and services, and still has to compete with low prices (and low wages).

The latest data from the World Economic Forum’s 2013-2014 Global Competitiveness Ranking rank Argentina 104th among 148 countries. The trend is alarming: Argentina was 70th in 2006-2007 and 87th in 2010-2011. The ranking is an index composed of 12 pillars grouped in three subindices: basic requirements (institutions, infrastructure, macroeconomic environment, and health and primary education); efficiency enhancers (higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, and market size); and innovation and sophistication (business sophistication and innovation).

Argentina has problems in the basic requirements index, where the only pillar in which it ranks reasonably well is that of health and primary education. In macroeconomic environment Argentina ranks 111th in 148 and a dreadful 143 over 148 in institutions, which underscores a lack of confidence in politicians, a low degree of respect for property rights, political favoritism, misuse of public resources, etc. The best area in this subindex is not perfect either. Argentina ranks 69 in primary education, but that is mostly due to the high coverage of primary education (we rank 19th in this regard), offset by an education quality rank of 102 out of 148 countries. This is consistent with the results of the PISA tests, where Argentina has lost ground to other countries: PISA scores for mathematics and reading were lower in Argentina than in Uruguay, Brazil and Chile.

Infrastructure will be a huge challenge for the next presidency. During the Kirchner years, investment was inefficient, and Argentina spent infrastructure stocks without replenishing them accordingly. Thus, Argentina fell in the WEF index in infrastructure from 63rd place in 2006-2007 to 89th place. More specifically, Argentina is in the 105th position in transport infrastructure. A recent paper published by CIPPEC and authored by Lucio Castro and José Barbero shows that logistic costs in Argentina increased 35% between 2003 and 2013 in real terms (that is, in constant pesos). In a country that has in the centre of its development agenda agro-industrial exports, this is alarming. Part of the problem is that most of the transport of goods, a whopping 90%, is done by truck, with only 5% being done by the much more efficient (for bulk and long distances) railways.

Argentina is not doing very well in the efficiency booster subindex. Argentina is 145 out of 148 in the goods market efficiency pillar, which is not surprising after so many years of Morenomics, the arbitrary interventions and prohibitions of Guillermo Moreno, former Commerce Secretary. Lack of competition, a high tax burden, tariff and non-tariff commercial barriers, labor markets and red tape affect the ranking. The tax burden is the most clearly visible: Argentina collects 37.3% of GDP in taxes, higher than the Latin-American average (20.5%) but also higher than the OECD average of 34.6%. High taxes particularly affect a labour market fraught with difficulties: in labour taxes Argentina ranks 147 out of 148 countries.

Credit is fundamental for development and Argentina ranks 133 in the financial market development pillar. One of the main factors for that is the ease of access to credit, where we rank 143rd. This is a long term concern for Argentina, which has traditionally had low savings and which now faces the particular difficulty of creating credit in an inflationary context. According to the World Bank, domestic credit to the private sector represents only 18.5% of GDP in Argentina; that is lower than Uruguay (24.1%), Venezuela (25.3%), Peru (26.7%), Mexico (27.7%), Paraguay (41.3%), Bolivia (44.2%), Colombia (52.2%), Brazil (68.4%), and Chile (73.2%).

Finally, Argentina ranks 98th in innovation and sophistication factors: 95th in business sophistication and 104th in innovation. As in other areas, there are specific islands of opportunity in this regard: for example, Argentina ranks 53rd in extent of marketing and 49th in quality of scientific research institutions. The challenge will be to harness those strengths to improve our overall productivity.

Clearly, Argentina faces today macroeconomic disorders that severely impact competitiveness. Opposition leaders and parties acknowledge almost unanimously the main problems: inflation, subsidies not focused on the most disadvantaged, fiscal deficits, etc. Many of the electoral packages starting to get assembled these days combine, thus, similar pieces: to lower inflation, reduce subsidies, eliminate restrictions on the agro-industrial sector, and improve international relations. ¿Is that enough? Fixing the macro situation is indeed necessary, but it is not enough to foster sustainable competitiveness: more complex issues need to be addressed, issues that regrettably are out of the agenda: institutions, education, efficient markets, financial markets, and innovation should be the focus of an agenda for Argentina in the 21st century.

* Miguel Braun is executive director of Fundación Pensar (PRO).

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